Elijah is an employee of a technology company and also has his own company on the side. He has contributed to a 401(k) plan for each job. Now he learned he contributed too much and could owe penalties. What should he do?
If Elijah’s excess contributions happened in 2024, he still has until his tax filing deadline to distribute his excess contributions plus earnings on the excess to fall within the limit. If he doesn’t take these steps before the deadline, Elijah will owe taxes on the excess, plus he won’t receive basis in the excess deferrals. Remember that the excess deferrals left in the plan will be taxed again when distributed.
The 401(k) contribution limit for 2024 was $23,000, [$23,500 in 2025]. Those age 50 and older can contribute an additional $7,500 in both years. However, in 2025 the additional contribution limit rises to $11,250 for those age 60 to 63, thanks to a change from the Secure Act 2.0.
Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.